Lion Posim Berhad's (KLSE:LIONPSIM) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Lion Posim Berhad (KLSE:LIONPSIM) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Lion Posim Berhad is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0079 = RM5.8m ÷ (RM871m - RM129m) (Based on the trailing twelve months to December 2021).

So, Lion Posim Berhad has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 6.3%.

View our latest analysis for Lion Posim Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lion Posim Berhad's ROCE against it's prior returns. If you're interested in investigating Lion Posim Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Lion Posim Berhad's ROCE Trending?

We're delighted to see that Lion Posim Berhad is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 0.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Lion Posim Berhad is utilizing 41% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Lion Posim Berhad's ROCE

In summary, it's great to see that Lion Posim Berhad has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 19% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Lion Posim Berhad (of which 1 is a bit unpleasant!) that you should know about.

While Lion Posim Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.